From time to time a Realtor may get the chance to work with an investor…or may have a listing where the most likely buyer will be an investor.
This is a helpful example of an estimation that an investor/buyer used when determining what price they would offer on a home.
As you will see, there is more to it than just what it will cost to make the repairs/replacement/upgrades, etc. Of course the investor wants a profit margin. What the investors want for a return on investment can vary widely.
The latest numbers show that a typical ROI is between 13-15%.
The investor may need to calculate labor costs, unforeseeable things that can come up, etc. Each house will vary in what it really needs. Maybe a new roof, new landscaping (including tearing out all of the old landscaping), new HVAC…… It is important for the investor/flipper to have a list of potential items that need to be looked at in these situations and try to know as much as they can before they start. The most important thing for a flipper is to limit the financial risk and maximize your return potential.
According to Investopedia, an investor should always keep the 70% rule in mind when purchasing a home to flip;
The 70% rule states that an investor should pay no more than 70% of the ARV (after-repair value) of a property minus the repairs needed. The ARV is what a home is worth after it is fully repaired.
Here’s an example: If a home’s ARV is $150,000 and it needs $25,000 in repairs, then the 70% rule means that an investor should pay no more than $80,000 for the home. $150,000 x 0.70 = $105,000 – $25,000 = $80,000.
So if you are working with a Buyer, you will need to know the comps for a renovated home, in order to back out the estimated costs and the profit margin, in order to determine what the offer price will be.
Investors will also consider the costs of selling the property when it is ready to be flipped, such as any closing costs and the commission, in their overall expenses calculation. Sometimes an agent will need to increase their commission on investment properties because they require a lot of work.
If you are working with a seller on a distressed property or one in severely dilapidated condition, you will likely need to do the same kind of calculations, in order to give them a realistic idea on who the buyer will be and what they are likely to see in an offer. If the seller is unhappy with the prospect for the likely sales price, their only other option would be for them to take on the renovations, themselves, and pocket the expected profit margin in what their proceeds would likely be.
Flipping is a tough business, but can be very gratifying and working with a Realtor during this process can make it much more enjoyable and manageable.